1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998 (mark one) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND - --- EXCHANGE ACT OF 1934 For the transition period from _______________ to __________________ Commission File Number 0-23852 PROJECT SOFTWARE & DEVELOPMENT, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2448516 (State or other jurisdiction (I.R.S employer incorporation or organization) identification number) 100 CROSBY DRIVE, BEDFORD, MASSACHUSETTS 01730 (Address of principal executive offices, including zip code) (formerly at 20 University Road Cambridge, MA. 02138) (781) 280-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares outstanding of the Registrant's common stock as of the latest practicable date: 10,025,823 shares of common stock, $.01 par value per share, as of January 31, 1999. 2 PROJECT SOFTWARE & DEVELOPMENT, INC. 10-Q INDEX PAGE PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets (unaudited) as 3 of December 31, 1998 and September 30, 1998. Consolidated Statements of Operations (unaudited) 4 for the three months ended December 31, 1998 and 1997. Consolidated Statements of Cash Flows (unaudited) 5 for the three months ended December 31, 1998 and 1997. Notes to Consolidated Financial Statements (unaudited). 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11 CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSES ABOUT MARKET RISK 28 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29 SIGNATURE 31 2 3 PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) DECEMBER 31, SEPTEMBER 30, 1998 1998 ------------ ------------- (IN THOUSANDS,EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents $ 28,876 $ 28,454 Marketable securities 39,412 38,922 Accounts receivable, trade, less allowance for doubtful accounts of $2,769 at December 31, 1998 and $2,614 at September 30, 1998, respectively 34,712 30,658 Prepaid expenses 3,174 2,799 Other assets 1,483 1,128 Deferred income taxes 1,596 1,697 -------- -------- Total current assets 109,253 103,658 -------- -------- Property and equipment, net 9,912 8,823 Computer software costs, net 119 248 Goodwill, net 1,398 1,082 Deferred income taxes 699 671 Other assets 38 38 -------- -------- Total assets $121,419 $114,520 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,309 $ 8,189 Accrued compensation 4,690 5,800 Income taxes payable 5,449 4,063 Deferred revenue 12,289 12,651 Deferred income taxes 187 287 -------- -------- Total current liabilities 32,924 30,990 -------- -------- Deferred income taxes 97 103 Deferred rent 169 144 Deferred revenue 525 615 Equity in minority interest 44 44 Commitments and contingencies Stockholders' Equity Preferred stock, $.01 par value; 1,000,000 authorized, none issued and outstanding Common stock, $.01 par value;15,350,000 authorized; 10,024,998 and 9,982,230 issued for December 31, 1998 and September 30, 1998, respectively 100 100 Additional paid-in capital 51,100 50,410 Retained earnings 36,616 32,330 Accumulated other comprehensive income (156) (216) -------- -------- Total stockholders' equity 87,660 82,624 -------- -------- Total liabilities and stockholders' equity $121,419 $114,520 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 3 4 PROJECT SOFTWARE & DEVELOPMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED DECEMBER 31, ----------- ------------ 1998 1997 ----------- ------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Revenues: Software $ 14,406 $ 11,143 Support and services 19,511 13,967 ----------- ----------- Total revenues 33,917 25,110 ----------- ----------- Cost of revenues: Software 1,144 604 Support and services 9,583 6,586 ----------- ----------- Total cost of revenues 10,727 7,190 ----------- ----------- Gross margin 23,190 17,920 Operating expenses: Sales and marketing 10,955 8,081 Product development 3,476 2,684 General and administrative 2,867 2,340 ----------- ----------- Total operating expenses 17,298 13,105 ----------- ----------- Income from operations 5,892 4,815 Interest income 648 736 Interest expense (17) (2) Other income (expense), net 72 15 ----------- ----------- Income before income taxes 6,595 5,564 Provision for income taxes 2,309 2,059 ----------- ----------- Net income $ 4,286 $ 3,505 =========== =========== Net income per share, basic $ 0.43 $ 0.36 ----------- ----------- Net income per share, diluted $ 0.42 $ 0.35 ----------- ----------- Shares used to calculate net income per share Basic 10,002,183 9,864,535 Diluted 10,202,463 10,042,325 The accompanying notes are an integral part of the consolidated financial statements. 4 5 PROJECT SOFTWARE & DEVELOPMENT, INC CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, DECEMBER 31, 1998 1997 ------------------ ------------------ (IN THOUSANDS) Cash flows from operating activities: Net income $ 4,286 $ 3,505 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,097 849 Loss on sale and disposal of property and equipment 12 29 Amortization of discount on marketable securities 51 -- Deferred rent 25 9 Deferred taxes (37) 190 Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable (3,635) 299 Prepaid expenses (381) (1,182) Other assets (771) (211) Accounts payable 1,485 (1,256) Accrued compensation (1,103) (1,349) Income taxes payable 1,466 1,245 Deferred revenue (441) (246) -------- -------- Net cash provided by operating activities 2,054 1,882 -------- -------- Cash flows from investing activities: Acquisitions of business, net of cash 141 -- Acquisitions of property and equipment (1,856) (2,381) Additions to computer software costs -- (679) Purchase of marketable securities (12,604) (36,164) Sale of marketable securities 12,087 35,673 -------- -------- Net cash used in investing activities (2,232) (3,551) -------- -------- Cash flows from financing activities: Proceeds from exercise of stock options including related tax benefit 690 370 -------- -------- Net cash provided by financing activities 690 370 -------- -------- Effect of exchange rate changes on cash (90) 111 -------- -------- Net increase/(decrease) in cash and cash equivalents 422 (1,188) Cash and cash equivalents, beginning of period 28,454 25,964 -------- -------- Cash and cash equivalents, end of period $ 28,876 $ 24,776 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. 5 6 PROJECT SOFTWARE & DEVELOPMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Project Software & Development, Inc. (PSDI) and its majority-owned subsidiaries (collectively, the "Company"), as of December 31, 1998 and have been prepared by the Company in accordance with generally accepted accounting principles for interim reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. All intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods indicated. The results of operations for the periods presented herein are not necessarily indicative of the results of operations to be expected for the entire fiscal year, which ends on September 30, 1999, or for any other future period. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended September 30, 1998 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 29, 1998. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. B. INCOME PER SHARE Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted average common shares outstanding plus additional common shares that would have been outstanding if dilutive potential common shares had been issued. For purposes of this calculation, stock options are considered common stock equivalents in periods in which they have a dilutive effect. 6 7 Basic and diluted earnings per share are calculated as follows: THREE MONTHS ENDED BASIC EPS 12/30/98 12/30/97 - --------------------------------------------------------------------------- Net income $ 4,286,249 $ 3,504,810 Weighted average common shares outstanding 10,002,183 9,864,535 Basic income per share $ 0.43 $ 0.36 DILUTED EPS - --------------------------------------------------------------------------- Net income $ 4,286,249 $ 3,504,810 Weighted average common shares outstanding 10,002,183 9,864,535 Common stock equivalents 200,280 177,790 ----------------------------- Total diluted shares 10,202,463 10,042,325 Diluted income per share $ 0.42 $ 0.35 C. ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131) is effective for financial statements for periods beginning after December 15, 1997. This statement will change the way companies report annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. The Company will adopt SFAS 131 for the current fiscal year ended September 30, 1999. The Company has not yet completed its analysis of the operating segments it will report on. Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits" (SFAS 132) is effective for financial statements for fiscal years beginning after December 15, 1997. SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. The Company will adopt SFAS 132 in the fiscal year ended September 30, 1999. The Company believes that the provisions of SFAS 132 will not, when adopted, have a material impact on the Company's consolidated financial statements. Statement of Financial Accounting Standards No. 133 on accounting for derivative instruments and hedging activities was issued in 7 8 June 1998. It is effective for fiscal years beginning after June 15, 1999, with earlier adoption encouraged. The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. The Company will adopt SFAS 133 in the fiscal year ended September 30, 2000. The Company believes that the provisions of SFAS 133 will not, when adopted, have a material impact on the Company's consolidated financial statements. Statement of Position 98-9 ("SOP 98-9") was issued in December 1998. SOP 98-9 amends paragraphs 11 and 12 of SOP 97-2, Software Revenue Recognition, to require recognition of revenue using the residual method when (1) there is vendor-specific objective evidence of the fair values of all undelivered elements in a multiple-element arrangement that is not accounted for using long-term contract accounting (2) vendor-specific objective evidence of fair value does not exist for one or more of the delivered elements in the arrangement, and (3) all revenue-recognition criteria in SOP 97-2 other than the requirement for vendor-specific objective evidence of the fair value of each delivered element of the arrangement are satisfied. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. Effective December 15, 1998, SOP 98-9 amends SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition, to extend the deferral of the application of certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. Earlier adoption is permitted as of the beginning of fiscal years or interim periods for which financial statements or information have not been issued. Retroactive application of the provisions of SOP 98-9 is prohibited. Based upon its reading and interpretations of SOP 98-9, the Company believes its current revenue recognition policies and procedures are materially consistent with SOP 98-9. 8 9 D. COMPUTER SOFTWARE COSTS Internally developed software costs capitalized were $0 and $675,000 for the three months ended December 31, 1998 and 1997,respectively. Amortization expense was $129,000 and $22,000 for the three months ended December 31, 1998 and 1997, respectively. Software costs are amortized on a straight-line basis over the estimated useful or market life of the software (generally, one to two years). E. ACQUISITIONS On December 10, 1998, the Company acquired the shares and assumed net liabilities of its Italian distributor, Work Management Consulting, s.r.l, for the sum of $411,000. The transaction was accounted for using the purchase method of accounting. The resulting goodwill is being amortized on a straight-line basis over five years. This acquisition was deemed to be immaterial for presentation of pro forma information purposes. F. SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid for interest and taxes were as follows: Three Months Ended ------------------ 1999 1998 ---- ---- (in thousands) Interest ........................... $ 17 $ 3 Income taxes ....................... 721 553 Acquisitions of businesses were as follows: Three Months Ended ------------------ 1999 1998 ---- ---- (in thousands) Fair value of assets acquired ...... $592 $--- Fair value of liabilities assumed .. 729 --- Net cash payments .................. 180 --- 9 10 G. COMPREHENSIVE INCOME Effective October 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The following is presented in accordance with this statement: (in thousands) - ----------------------------------------------------------------------- THREE MONTHS ENDED THREE MONTHS ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 - ----------------------------------------------------------------------- Net Income $4,286 $3,505 - ----------------------------------------------------------------------- Other comprehensive income, net of tax: - ----------------------------------------------------------------------- Unrealized holding gain (loss) on 24 (210) securities arising during period - ----------------------------------------------------------------------- Foreign currency translation 36 (56) adjustments - ----------------------------------------------------------------------- Comprehensive income $4,346 $3,239 - ----------------------------------------------------------------------- 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS In addition to historical information this Quarterly Report contains forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Factors Affecting Future Performance". Readers should carefully review the risk factors described in other documents that the Company files from time to time with the Securities and Exchange Commission, including the Annual Report on Form 10-K filed by the Company on December 29, 1998. OVERVIEW The Company develops, markets and supports enterprise asset maintenance software used by businesses, governments and other organizations to improve the productivity of facilities, plants and production equipment. The Company complements its asset maintenance software with an Internet-based business-to-business e-commerce network. The Company's revenues are derived primarily from two sources: (i) software licenses and (ii) fees for services, including support contracts, training and consulting services and connect fees for on-line charges to engage in electronic commerce for Maintenance Repair Operations ("MRO") supplies. ACQUISITIONS On December 10, 1998, the Company acquired the shares and assumed net liabilities of its Italian distributor, Work Management Consulting, s.r.l, for the sum of $411,000. The transaction was accounted for using the purchase method of accounting. The resulting goodwill is being amortized on a straight-line basis over five years. This acquisition was deemed to be immaterial for presentation of pro forma information purposes. 11 12 RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1997 REVENUES Three Three Months Months Ended Ended (in thousands) 12/31/98 CHANGE % 12/31/97 - ----------------------------------------------------------------------- Software licenses $14,406 29.3% $11,143 Percentage of total revenues 42.5% 44.4% Support and services $19,511 39.7% $13,967 Percentage of total revenues 57.5% 55.6% Total revenues $33,917 35.1% $25,110 The growth in revenues is generated from the Company's MAXIMO software and related support and services. A significant portion of the Company's revenues are derived from operations outside of the United States. Revenues from sales outside the United States increased 51.8% to $16.7 million or 49.2% of revenues for the three months ended December 31, 1998, compared to $11.0 million or 43.8% of revenues for the three months ended December 31, 1997. The increase in the percentage of revenues generated outside the U.S. for the three months ended December 31, 1998 can be attributed to the Company's continued global expansion, which for the first quarter of fiscal 1999 included the acquisition of its Italian distributor, the incorporation of a wholly-owned subsidiary in the People's Republic of China and the opening of a regional headquarters in Hong Kong. Software licenses for the three months ended December 31, 1998 increased 29.3% to $14.4 million from $11.1 million. Contributing to this increase was a significant e-commerce software license of approximately $2.5 million. There can be no assurance of recurring licenses of this size in e-commerce owing to the emerging nature of this market. (1) Also, contributing to the growth is the recognition of MAXIMO software licenses, which grew 8.4% primarily attributable to the release of the Company's pre-configured industry applications, MAXIMO for Facilities and - ----------------------------- (1) Forward looking statement 12 13 MAXIMO for Industry, released in fiscal 1998. Software licenses as a percentage of revenues have decreased to 42.5% in the three months ended December 31, 1998 from 44.4% in the three months ended December 31, 1997. While the Company did not experience a slow down in the sale of MAXIMO software licenses, the Company cautions that there may be a future slow down in the enterprise software application market due to cautious information technology spending due to the year 2000 issues. (1) The increase in support and services revenues is attributable to increases in both MAXIMO support contracts and consulting services. Consulting services have grown 49.5% for the three months ended December 31, 1998 compared to the three months ended December 31, 1997 and continue to be a large percentage of total revenues due to additional service demands in connection with large scale implementations of the Company's MAXIMO product. Support services have grown 23.5% for the three months ended December 31, 1998 compared to the three months ended December 31, 1997. The increase in the percentage of support revenues is in direct relation to the increase in software license revenues. Currently, approximately 90% of all domestic MAXIMO customers renew their maintenance contracts. COST OF REVENUES Three Three Months Months Ended Ended (in thousands) 12/31/98 CHANGE % 12/31/97 - ----------------------------------------------------------------------------- Software licenses $ 1,144 89.4% $ 604 Percentage of software licenses 7.9% 5.4% Support and services $ 9,583 45.5% $6,586 Percentage of support and services 49.1% 47.2% Total cost of revenues $10,727 49.2% $7,190 Percentage of total revenues 31.6% 28.6% Cost of software revenues consists of royalties paid to vendors of third party software, the amortization of capitalized software, the cost of software product packaging and media, and certain employee costs related to software duplication, packaging and shipping. The increase in the cost of software revenues is due primarily to royalties paid to third party vendors for software and costs for third party software products and amortization of capitalized software. - ----------------------------- (1) Forward looking statement 13 14 Cost of support and services consists primarily of personnel costs for employees and the related costs of benefits and facilities. The increase in the cost of support and services is attributable to the hiring of employees and the extensive use of third-party consultants contracted to perform services for the Company. The Company utilizes the services of these higher cost third-party consultants in order to meet the heavy services demand and backlog. The cost of the services component as a percentage of services revenues increased to 66.9% from 64.1% for the three months ended December 31, 1998 and 1997, respectively. OPERATING EXPENSES Three Three Months Months Ended Ended (in thousands) 12/31/98 CHANGE % 12/31/97 - ----------------------------------------------------------------------- Sales and marketing $10,955 35.6% $8,081 Percentage of total revenues 32.3% 32.2% Product development $ 3,476 29.5% $2,684 Percentage of total revenues 10.2% 10.7% General and administrative $ 2,867 22.5% $2,340 Percentage of total revenues 8.5% 9.3% The increase in sales and marketing expenses for the three months ended December 31, 1998 is primarily due to increases in sales and marketing personnel, costs for global expansion and sales commissions based on revenue growth. Also, contributing to this increase is higher costs for travel and lodging due partially to price increases imposed by the airline and travel industries. The increase in product development expenses for the three months ended December 31, 1998 is attributable to an increase in salary related expenses due to the hiring of additional personnel and no capitalization of software costs for the three months ended December 31, 1998. Capitalization of software costs were $0 and $675 thousand for the three months ended December 31, 1998 and 1997, respectively. The decrease as a percentage of revenues for the three months ended December 31, 1998 is primarily attributable to increases in revenue growth without a commensurate increase in product development expenses. The Company will continue to make investments in a new MAXIMO Java-based component architecture including a mobile application suite of products. (1) The Company will also expend development dollars on its M|net electronic commerce product for MRO supply chain management. (1) The Company will continue to invest in - ----------------------------- (1) Forward looking statement 14 15 client/server MAXIMO including application programming interfaces to enterprise resource planning application software products developed by Oracle, PeopleSoft and SAP. (1) The increase in general and administrative expenses for the three months ended December 31, 1998 is primarily due to the hiring of additional general and administrative personnel and related benefits to support the revenue growth of the Company. The decrease as a percentage of revenues for the three months ended December 31, 1998 is primarily attributable to increases in revenue growth at a faster pace than increases in general and administrative expenses. NON-OPERATING EXPENSES Three Three Months Months Ended Ended (in thousands) 12/31/98 CHANGE % 12/31/97 - -------------------------------------------------------------- Interest income $648 (12.0%) $736 Interest (expense) $(17) 7.5% $ (2) Other income (expense) $ 72 3.8% $ 15 Interest income for the period ended December 31, 1998 is attributable to interest earned on cash equivalents from cash flow generated from operations including accounts receivable collections. The days sales outstanding was 92 days for the quarter ended December 31, 1998 compared to 84 days for the quarter ended December 31, 1997. The Company has established a target of 90 to 95 days for its quarterly days sales outstanding.(1) The increase in other income (expense) is primarily attributable to foreign currency translation gains for the quarter ended December 31, 1998. PROVISION FOR INCOME TAXES The Company's effective tax rates were 35.0% and 37.0% for the three months ended December 31, 1998 and 1997, respectively. The Company anticipates that its fiscal 1999 effective tax rate will not exceed 36%. (1) - ----------------------------- (1) Forward looking statement 15 16 LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1998, the Company had cash and cash equivalents and marketable securities of approximately $68.3 million and working capital of $76.3 million. Cash generated by operations for the three months ended December 31, 1998 was $2.1 million, primarily attributable to net income and an increase in accounts payable, offset by an increase in receivables as a result of the increase in revenues. Cash used in investing activities totaled $2.2 million, primarily for the purchase of marketable securities and the purchase of property and equipment. Cash generated by financing activities was $690 thousand, primarily from proceeds received from exercises of employee stock options. As of December 31, 1998, the Company's principal commitment consisted primarily of an office lease for its headquarters. Under the terms of the lease agreement, upon termination of the lease the Company has the right to extend the lease for an additional six year term for an agreed upon fixed cost. The Company leases its facilities and certain equipment under non-cancelable operating lease agreements that expire at various dates through November 2003. The Company relocated its corporate headquarters in December 1997. The Company may use a portion of its cash to acquire businesses, products and technologies complementary to its business. (1) The Company believes that its current cash balances combined with cash flow from operations will be sufficient to meet its working capital and capital expenditure requirements through at least September 30, 1999. (1) YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Certain computer programs that have date sensitive software and use two digits only may recognize a date using "00" as the year 1900 rather than the year 2000. Management has initiated a program to prepare the Company's financial, manufacturing and other critical systems and applications for the year 2000. The focus of the program is to identify affected software and hardware, develop a plan to correct that software or hardware in the most cost efficient and effective manner and implement and monitor that plan. The Company will also assess the readiness of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own - ----------------------------- (1) Forward looking statement 16 17 Year 2000 issues. The Company utilizes other third party software products, network equipment and telecommunications products. Failure of any critical technology components to operate properly in the Year 2000 may have an adverse impact on business operations or require the Company to incur unanticipated expenses to remedy any problems. There can be no guarantee that the systems of other companies will be timely converted, or that a failure to convert by another company would not have a material adverse effect on the Company. The Company currently estimates that the costs associated with preparing internal systems for the Year 2000 should not exceed $100,000. (1) There can be no assurances that as the Company continues its program of reviewing internal systems that the costs will not exceed $100,000. The Company has evaluated its software products and determined that the current versions of MAXIMO Release 4.0.0 and 4.0.1 and 3.0.3 will continue to operate properly into the year 2000. Earlier versions of MAXIMO may be modified by the customer to operate properly into the year 2000 pursuant to instructions which are furnished to the customer by the Company. The Company's product PROJECT/2 is no longer sold but the Company does offer support for this product. The Company will release an upgrade of this product that will enable this product to recognize date data. The Company's other products, MAXIMO Scheduler 4.0 and 3.0 and P/X are currently being tested for compliancy. The Company estimates that the cost to upgrade these products and any other older versions of its products will be approximately $500,000.(1) (For further discussion on the Year 2000, please see Year 2000 under Factors Affecting Future Performance.) EURO COMPLIANCE On January 1, 1999, eleven European Union member states adopted the euro as their common national currency. Thereafter, until January 1, 2002, the transition period, either the euro or a participating country's present currency will be accepted as legal tender. Beginning on January 1, 2002, euro-denominated bills and coins will be issued, and by July 1, 2002, only the euro will be used. A significant number of the Company's customers are located, or transact business with, or have operations in participating European Union countries. As a result, the computer systems or software used by these companies may need to be upgraded to comply with data storage and computational euro requirements. In the first fiscal quarter of 1999, the Company released a new English language client/server version of MAXIMO (MAXIMO 4.0.1) that accepts, stores, calculates, converts and reports euro currency. Other primary languages will be made generally available in the second fiscal quarter of 1999. The amount of development dollars spent on the euro release will not have a material adverse effect on the Company's results of operations or financial condition. (1) The - ----------------------------- (1) Forward looking statement 17 18 Company has initiated a program to determine what, if any, internal systems need to be replaced to comply with the requirements for the adoption of the euro. FACTORS AFFECTING FUTURE PERFORMANCE The nature of forward-looking information is that such information involves assumptions, risks and uncertainties. Certain public documents of the Company and oral statements made by authorized officers, directors, employees, agents and representatives of the Company, acting on its behalf, may include forward-looking information which will be influenced by the following and other assumptions, risks and uncertainties. Forward-looking information requires management of the Company to make assumptions, estimates, forecasts and projections regarding the Company's future results as well as the future effectiveness of the Company's strategic plans and future operational decisions. Forward-looking statements made by or on behalf of the Company are subject to the risk that the forecasts, projections, and expectations of management, or assumptions underlying such forecasts, projections and expectations, may become inaccurate. Accordingly, actual results and the Company's implementation of its plans and operations may differ materially from forward-looking statements made by or on behalf of the Company. The following discussion identifies certain important factors that could affect the Company's actual results and actions and could cause such results and actions to differ materially from any forward-looking statements made by or on behalf of the Company that related to such results and actions. Other factors, which are not identified herein, could also have such an effect. RAPID TECHNOLOGICAL CHANGE The computer software industry is characterized by rapid technological advances, changes in customer requirements and frequent product introductions and enhancements. The Company's success depends upon its ability to continue to enhance its current products and to develop and introduce new products that keep pace with technological developments, respond to evolving customer requirements and achieve market acceptance. In particular, the Company believes that it must continue to respond quickly to users' needs for broad functionality and to advances in hardware and operating systems. Any failure by the Company to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could result in a loss of competitiveness and revenues. There can be no assurance that the Company will be successful in developing and marketing new products or product enhancements, or that the Company will not experience significant delays in developing such new products or product enhancements. Such delays could have a material adverse 18 19 effect on the Company's results of operations. In addition, there can be no assurance that new products and product enhancements developed by the Company will achieve market acceptance. DEPENDENCE ON MAXIMO The Company's revenues are primarily attributable to the licensing of its MAXIMO client/server product, introduced in 1991, and to related services and support. Revenues from licenses of MAXIMO and related services and support accounted for approximately 93.8% of the Company's total revenues in fiscal 1998. The Company's financial performance in fiscal 1999 will depend on continued market acceptance of MAXIMO. The Company believes that continued market acceptance of MAXIMO will largely depend on its ability to enhance and broaden the capabilities of MAXIMO, by, among other things, developing additional application modules for MAXIMO, versions of MAXIMO and by developing and incorporating into the MAXIMO product technologies that are emerging in connection with the Internet. Any factor adversely affecting sales of MAXIMO, such as delays in development, significant software flaws, incompatibility with significant hardware platforms, operating systems or databases, increased competition or negative evaluations of the products, would have a material adverse effect on the Company's business and financial results. The Company made the English language version of MAXIMO Release 4.0 generally available in March 1998 for new clients. In the fourth quarter of the fiscal year ended 1998, the Company released primary language versions of MAXIMO 4.0 in Brazilian Portuguese, Dutch, French, German, Japanese, Latin American Spanish, and Swedish. The failure of MAXIMO 4.0 to achieve market acceptance would have a material adverse effect on the Company's business and financial results. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY The Company has experienced, and may in the future experience, significant period-to-period fluctuations in revenues and operating results. The Company's revenues and income from operations typically grow at a lower rate or decline in the first quarter of each fiscal year, compared to the fourth quarter of the preceding fiscal year. In addition, revenues are typically higher in the fourth quarter than in other quarters of the year. The Company believes that these quarterly patterns are partly attributable to the Company's sales commission policies, which compensate members of the Company's direct sales force for meeting or exceeding annual quotas. In addition, the Company's quarterly revenues and operating results have fluctuated historically, due to the number and timing of product introductions and enhancements, the budgeting and purchasing cycles of customers, the timing of product shipments and the timing of marketing and product development expenditures. The 19 20 Company typically realizes a significant portion of its revenue from sales of software licenses in the last two weeks of a quarter, frequently even in the last days of a quarter. Large software license contracts may have a significant impact on revenues for any quarter and could, therefore, result in significant fluctuations in quarterly revenues and operating results. Accordingly, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. The Company generally ships its products upon receipt of orders and maintains no significant product backlog. As a result, revenues from license fees in any quarter are substantially dependent on orders booked and shipped in that quarter. A delay in or loss of orders can cause significant variations in operating results. A significant portion of the Company's operating expenses are fixed in the short term, and planned expenditures are based primarily on sales forecasts. Accordingly, if revenues do not meet the Company's expectations in any given quarter, operating results may be materially adversely affected. COMPETITION The market for applications software is intensely competitive and rapidly changing. While the Company believes that it has competed effectively to date, competition in its industry is likely to intensify as current competitors expand their product lines and new companies enter the market. To remain successful in the future, the Company must respond promptly and effectively to the challenges of technological change, evolving standards and its competitors' innovations by continually enhancing its own products, services and support offerings, as well as its marketing programs. There can be no assurance that the Company will continue to be able to compete successfully in the future. The market for asset maintenance software is fragmented by geography, by hardware platform and by industry orientation, and is characterized by a large number of competitors. Currently, the Company's client/server versions of MAXIMO compete with products of a number of large vendors some of which have traditionally provided maintenance software running on mainframes and minicomputers and are now offering systems for use in the client/server environment. MAXIMO also competes with integrated enterprise resource planning systems which are provided by several large vendors and which include maintenance modules. MAXIMO also encounters competition from vendors of low cost maintenance management systems designed initially for use by a single user or limited number of users as vendors of these products upgrade their functionality to enter the client/server market. 20 21 The MRO supply chain management business using electronic commerce has many diverse competitors offering a wide range of differing products, services and technologies. While the Company believes that electronic commerce products and technologies complement the Company's existing products, there can be no assurance that the Company will be able to compete successfully in this market. Certain of the Company's competitors have greater financial, marketing, service and support and technological resources than the Company. To the extent that such competitors increase their focus on the asset maintenance or planning and cost systems markets, the Company could be at a competitive disadvantage. INTERNATIONAL OPERATIONS A significant portion of the Company's total revenues are derived from operations outside the United States. The Company derived 45.7%, 43.8%, and 40.5% of its total revenue from sales outside the United States in fiscal years 1998, 1997, and 1996, respectively. The Company expects that international revenues will continue to be a significant percentage of total revenues. The Company expects international revenues to continue to grow in absolute dollars during 1999, and accordingly, continues to invest heavily in international infrastructure, global product functionality and translated versions of financial and other software products. In the event international expansion and/or product globalization efforts are not successful, the Company's business operating results and financial condition may be adversely affected. This international business is subject to various risks common to international activities, including exposure to currency fluctuations, greater difficulty in collecting accounts receivable, political and economic instability, the greater difficulty of administering business abroad and the need to comply with a wide variety of foreign import and United States export laws and regulatory requirements. A significant portion of the Company's total revenue is derived from international operations that are conducted in foreign currencies. Changes in the values of these foreign currencies relative to the United States dollar have in the past adversely affected, and may in the future affect, the Company's results of operations and financial position. Gains and losses on translation to United States dollars and settlement of receivables from international subsidiaries may contribute to fluctuations in the Company's results of operations. To date, the Company has not engaged in currency hedging transactions. The Company may in the future undertake currency hedging, although there can be no assurance that hedging transactions, if entered into, would materially reduce the effects of fluctuations in foreign currency exchange rates on the Company's results of operations. The Company experienced lower than anticipated revenue growth rates in the Asia Pacific region during 1998 in part due to the economic difficulties that have occurred 21 22 throughout this region. There can be no assurances that the economy of this region will recover in the near future or that the Company's growth rates in this geographic region will return to the previous levels if the recovery occurs. DEPENDENCE ON THIRD PARTIES The client/server versions of MAXIMO operate with the Oracle, SQLServer, and SQLBase database management systems. MAXIMO ADvantage runs on the Microsoft Access database. Introduction and increased market acceptance of database management systems with which the Company's products do not operate could adversely affect the market for the Company's products. The Company has entered into nonexclusive license agreements with Centura Software Corporation, Scribe Technologies, Incorporated, Cognos Corporation, Netronic Software GmbH, HSB Reliability Technologies Corporation, Intelligent Labeling Technologies, Incorporated, WebLogic, Incorporated, Marimba, Inc., and Intermat, Inc. pursuant to which the Company incorporates into its products software providing certain application development, user interface, business intelligence, content and graphics capabilities developed by these companies. If the Company were unable to renew these licenses, or if any of such vendors were to become unable to support and enhance its products, the Company could be required to devote additional resources to the enhancement and support of these products or to acquire or develop software providing equivalent capabilities, which could cause delays in the development and introduction of products incorporating such capabilities. PRODUCT DEVELOPMENT: INTERNET The Company is currently developing a Java-based component architect software application to incorporate into the MAXIMO product technologies emerging in conjunction with the Internet. Internet technologies and applications generally are developing and gaining acceptance rapidly in the market. MRO supply chain management using electronic commerce is a nascent market with many standards and technologies remaining to be developed. Accordingly, developing technologies pose risks to the Company. The Company believes that electronic commerce products and technologies complement the Company's existing products. There can be no assurance that the Company will successfully anticipate trends in this market, that the Company will be successful in Internet technology development or acquisition efforts or that the Company's Internet applications, if developed, will achieve market acceptance. LIMITED INTELLECTUAL PROPERTY PROTECTION The Company's success is dependent upon proprietary technology. The Company currently has no patents and protects its technology primarily through copyrights, trademarks, trade secrets and 22 23 employee and third party nondisclosure agreements. The Company's software products are sometimes licensed to customers under "shrink wrap" licenses included as part of the product packaging. Although, in larger sales, the Company's shrink-wrap licenses may be accompanied by specifically negotiated agreements signed by the licensee, in many cases its shrink-wrap licenses are not negotiated with or signed by individual licensees. Certain provisions of the Company's shrink-wrap licenses, including provisions protecting against unauthorized use, copying, transfer and disclosure of the licensed program, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of its technology or development by others of similar technology. Although the Company believes that its products and technology do not infringe on any existing proprietary rights of others, there can be no assurance that third parties will not assert infringement claims in the future. GENERAL ECONOMIC RISK FACTORS To date, inflation has not had a material impact on the Company's financial results. There can be no assurance, however, that inflation will not adversely affect the Company's financial results in the future. DEPENDENCE ON KEY PERSONNEL The Company is highly dependent on certain key executive officers and technical employees, the loss of one or more of who could have an adverse impact on the future operations of the Company. The Company continues to hire a significant number of additional sales, services and technical personnel. Competition for hiring of such personnel in the software industry is intense, and the Company from time to time experiences difficulty in locating candidates with the appropriate qualifications within the desired geographic locations, or with certain industry specific domain expertise. It is widely believed that the technology industry is at or beyond a condition of full employment. The Company does not have employment contracts with, and does not maintain key person life insurance policies on, any personnel. In addition, the Company may need to hire additional skilled personnel to support the continued growth of its business. There can be no assurance that the Company will be able to retain its existing personnel or attract additional qualified employees. CERTAIN RISKS ASSOCIATED WITH ACQUISITIONS As part of its overall strategy, the Company plans to continue to acquire or invest in complementary companies, products, or technologies and to enter into joint ventures and strategic 23 24 alliances with other companies. There can be no assurance that the Company would be successful in overcoming the risks associated or problems encountered in connection with such business combinations, investments, or joint ventures, or that such transactions will not materially adversely affect the Company's business, financial condition, or operating results. POSSIBLE CONTINUED VOLATILITY OF STOCK PRICE Fiscal 1998 was marked by significant fluctuations in the market price of the common stock, par value $.01 per share, of the Company (the "Common Stock"). Factors such as announcements of technological innovations or new products by the Company, its competitors and other third parties, as well as quarterly variations in the Company's results of operations and market conditions in the industry, may cause the market price of the Common Stock to continue to fluctuate significantly. In addition, the stock market in general has recently experienced substantial price and volume fluctuations, which have particularly affected the market prices of many software companies and which have often been unrelated to the operating performance of such companies. These broad market fluctuations also may adversely affect the market price of the Common Stock. LITIGATION RISKS The Company is subject to the normal risks of litigation with respect to its business operation. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Certain computer programs that have date sensitive software and use two digits only may recognize a date using "00" as the year 1900 rather than the year 2000. Management has initiated a program to prepare the Company's financial, manufacturing and other critical systems and applications for the year 2000. The focus of the program is to identify affected software and hardware, develop a plan to correct that software or hardware in the most effective manner and implement and monitor that plan. The Company has begun to assess the readiness of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company utilizes other third party software products, network equipment and telecommunications products. Failure of any critical technology components to operate properly in the Year 2000 may have an adverse impact on business operations or require the Company to incur unanticipated expenses to remedy any problems. There can be no guarantee that the systems of other companies will be timely converted, or that a failure to convert 24 25 by another company would not have a material adverse effect on the Company. The Company currently estimates that the costs associated with preparing internal systems for the Year 2000 should not exceed $100,000. There can be no assurances that as the Company continues its program of reviewing internal systems that the costs will not exceed $100,000. The Company has begun to develop a contingency plan based on the final results gathered from its suppliers and third parties. The Company plans to finalize this plan by end of September 1999. The Company has evaluated its software products and determined that the current versions of MAXIMO Release 4.0.0 and 4.0.1 and 3.0.3 will continue to operate properly into the year 2000. MAXIMO version 3.0.2 is not fully compliant. Customers must upgrade to Release 3.0.3 or Release 4.0.1 and allow adequate time for conversion of data. MAXIMO releases prior to MAXIMO Release 3.0.2 must be upgraded from the user's existing version to MAXIMO 3.0.3 in order to be year 2000 compliant. Upgrades will be provided free of charge. MAXIMO ADvantage 4.0 is intended to be year 2000 compliant. The production release for ADvantage 4.0 is scheduled for the end of March 1999. Customers using prior versions of ADvantage must be upgraded to ADvantage 4.0 to be year 2000 compliant. Upgrades will be provided free of charge. The Company's electronic commerce product, M|net, is currently being tested for year 2000 compliance. Testing is scheduled to be completed by the end of June 1999. The Company's product PROJECT/2 is no longer sold but the Company does offer support for this product. The Company will release an upgrade of this product targeted for the fourth quarter of fiscal 1999 that will enable this product to recognize date data after January 1, 2000 and handle leap year calculations. MAXIMO Scheduler 4.0 and 3.0 and P/X are currently being tested for compliancy. The Company estimates that the cost to upgrade all of its products to be year 2000 enabled will be approximately $500,000. The Company does not believe that the advent of the Millennium has caused any positive or negative impact on revenues from the Company's software products during fiscal 1998. While the Company has experienced customer requests to replace non-compliant Year 2000 applications, it also believes that certain market segments have deferred procuring asset maintenance systems while they complete the implementation of ERP systems. The Company cautions that there may be a slow down in the future in the enterprise application market due to cautious information technology spending due to the year 2000 issues. The Company will continue to monitor the potential impact of the arrival of the Millennium on its software revenues. EURO COMPLIANCE On January 1, 1999, eleven European Union member states adopted the euro as their common national currency. Thereafter, until January 1, 2002, the transition period, either the euro or a participating country's present currency will be accepted as 25 26 legal tender. Beginning on January 1, 2002, euro-denominated bills and coins will be issued, and by July 1, 2002, only the euro will be used. A significant number of the Company's customers are located, or transact business with, or have operations in participating European Union countries. As a result, the computer systems or software used by these companies may need to be upgraded to comply with data storage and computational euro requirements. In the first fiscal quarter of 1999, the Company released a new English language client/server version of MAXIMO (MAXIMO 4.0.1) that accepts, stores, calculates, converts and reports euro currency. Other primary languages will be made generally available in the second fiscal quarter of 1999. The amount of development dollars spent on the euro release will not have a material adverse effect on the Company's results of operations or financial condition. The Company has initiated a program to determine what, if any, internal systems need to be replaced to comply with the requirements for the adoption of the euro. ACCOUNTING POLICIES THAT MAY HAVE AN ADVERSE EFFECT Statement of Position 98-9 ("SOP 98-9") was issued in December 1998. SOP 98-9 amends paragraphs 11 and 12 of SOP 97-2, Software Revenue Recognition, to require recognition of revenue using the residual method when (1) there is vendor-specific objective evidence of the fair values of all undelivered elements in a multiple-element arrangement that is not accounted for using long-term contract accounting (2) vendor-specific objective evidence of fair value does not exist for one or more of the delivered elements in the arrangement, and (3) all revenue-recognition criteria in SOP 97-2 other than the requirement for vendor-specific objective evidence of the fair value of each delivered element of the arrangement are satisfied. Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. Effective December 15, 1998, SOP 98-9 amends SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition, to extend the deferral of the application of certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. Earlier adoption is permitted as of the beginning of fiscal years or interim periods for which financial statements or information have not been issued. Retroactive application of the provisions of SOP 98-9 is prohibited. Based upon its reading and interpretations of SOP 98-9, the Company believes its current 26 27 revenue recognition policies and procedures are materially consistent with SOP 98-9. NO REVISIONS OR UPDATES TO FORWARD-LOOKING STATEMENTS The Company will have no obligation to release publicly any revision or update to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 27 28 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NOT APPLICABLE 28 29 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Amended and Restated Articles of Organization of the Company (included as Exhibit 3.3 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 3.2 Restated By-Laws of the Company, as amended (included as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996, File No. 0-23852 and incorporated herein by reference) 3.3 Form of Certificate of Designation of Series A Junior Participating Preferred Stock of Project Software & Development, Inc. (which is attached as Exhibit A to the Rights Agreement included as Exhibit 4 (b) to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated herein by reference) 4. Instruments defining the Rights of Security Holders, Including Indentures 4.1 Specimen certificate for the Common Stock of the Company (included as Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 4.2 Article 4B of the Amended and Restated Articles of Organization of the Company (included as Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 4.3 Rights Agreement dated as of January 27, 1998, between Project Software & Development, Inc. and BankBoston, N.A. as Rights Agent (included as Exhibit 4 (a) to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated herein by reference) 4.4 Form of Certificate of Designation of Series A Junior Participating Preferred Stock of Project Software & Development, Inc. (included as Exhibit 29 30 4 (b) to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated herein by reference) 4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated herein by reference) 27. Financial Data Schedule 27.1 Financial Data Schedule (b) Reports on Form 8-K During the three months ended December 31, 1998, the Company filed a current report on Form 8-K related to the naming of Stephen B. Sayre to the Company's Board of Directors. 30 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROJECT SOFTWARE & DEVELOPMENT, INC. Date: February 12, 1999 By: /s/ Paul D. Birch ----------------- ---------------------------------- Paul D. Birch Authorized Officer Executive Vice President Finance & Administration, Chief Financial Officer and Treasurer (Principal Financial Officer) 31 32 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION PAGE - ------- ----------- ---- 3.1 Amended and Restated Articles of Organization of the Company (included as Exhibit 3.3 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 3.2 Restated By-Laws of the Company, as amended (included as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996 File No. 0-23852 and incorporated herein by reference) 3.3 Form of Certificate of Designation of Series A Junior Participating Preferred Stock of Project Software & Development, Inc. (which is attached as Exhibit A to the Rights Agreement included as Exhibit 4 (b) to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated herein by reference) 4.1 Specimen certificate for the Common Stock of the Company (included as Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 4.2 Article 4B of the Amended and Restated Articles of Organization of the Company (included as Exhibit 4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by reference) 4.3 Rights Agreement dated as of January 27, 1998, between Project Software & Development, Inc. and BankBoston, N.A. as Rights Agent (included as Exhibit 4 (a) to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated herein by reference) 4.4 Form of Certificate of Designation of Series A Junior Participating Preferred Stock of Project Software & Development, Inc. (included as Exhibit 4 (b) to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated herein by reference) 4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated herein by reference) 27.1 Financial Data Schedule